Budget 2022: Implications for India's defence policy

As India’s Finance Minister Nirmala Sitharaman prepares to announce India’s budget for the fiscal year (FY) 2022-2023, she will be weighing several domestic priorities with the ongoing and pressing external challenges India continues to face. Whether on land in the Himalayas along the line of actual control, or the high seas of the Indian Ocean, India continues to face serious challenges that it must tackle with finite resources and an economy still recovering from the impact of the Covid-19 pandemic. In the backdrop of such a threat environment, how India’s upcoming budget tackles the ongoing challenges of modernisation and indigenisation can impact the trajectory of India’s defense policy.

The rise of India as an emerging power, as well as an evolving security environment, has been accompanied by a push for India to modernise its military. While India maintains a large defense budget — it spends nearly two percent of its gross domestic product on defense and had the third-largest defense budget in FY2021-22 — India’s military also requires urgent modernisation. In 2018, India’s then-vice chief of army staff, Lt. Gen. Sarath Chand testified before the Parliamentary Standing Committee on Defense that “Typically, any modern Armed Forces should have… one-third of its equipment in the vintage category, one-third in the current category, and one-third in the state-of-art category.” The reality he said, however, is quite different. “The state today is 68 percent of our equipment is in the vintage category, with just about 24 percent in the current and 8 percent in the state-of-art category.”

Last year’s budget included provisions that were aimed at turning this situation around. Not only did the total allocation for defense for FY 2021-22, including pension-related expenditures, increase by 1.48 percent from Rs 4.71 lakh crore in FY 2020-21 to Rs 4.78 lakh crore in FY 2021-22, but the budgeted capital expenditure, which would support purchases of new equipment, would increase by 18.75 percent. However, despite this significant increase, it is clear that the liabilities from India’s existing pipeline of defense equipment it has already committed to purchasing would take up nearly 90 percent of the budgeted capital expenditure, leaving only a meager amount for additional modernisations. Moving forward, the budget will not only need to keep up this level of allocation of capital expenditure but take additional steps if the government wishes to significantly reduce the vintage equipment currently deployed by the armed forces.

India also is in the unique situation of having one of the largest defense budgets in the world while also being the world’s second-largest importer of defense equipment. Boosting India’s self-reliance, or atmanirbharta, in defense production has emerged as a key priority for Prime Minister Modi’s government. The government has, indeed, taken steps to advance this goal, including establishing a “negative list” of equipment that will be barred from being imported between 2020 and 2025, releasing a new Defense Acquisition Procedure that emphasizes indigenous sources of defense equipment, and sub-allocating 63 percent of the allocated capital expenditure budget towards procurement of defense equipment from only domestic sources. However, despite these steps, there are still several further reforms that remain ripe for the government to undertake as part of its FY 2022-2023 budget.

One area that experts have identified as being a significant obstacle to the indigenisation of India’s defense industry has been the unpredictability of India’s expenditure, which has been hamstrung due to an inability to make multi-year financial commitments. The 15th Finance Commission had made a recommendation to establish a “dedicated, non-lapsable fund called the Modernization Fund for Defense and Internal Security (MFDIS)” to address this issue. If such a fund could be structured to allow any unutilised funds that were allocated for capital expenditures to be reallocated to this fund, rather than surrendered under the current rules, it could provide a boost to indigenization within the defense sector.

Another step could be to expand the Production Linked Incentive (PLI) Scheme, which the finance minister announced during last year’s budget in order to encourage domestic manufacturing, reduce imports, and promote exports in 13 sectors. The government has already launched a PLI scheme for drones, which has significant defense applications.

India faces a challenging geopolitical environment, with threats in the continental domain from its neighbors to the north, in the maritime domain in the Indian Ocean Region, and in the overall balance of airpower. These threats are sharpening at the same time as India looks to focus on a myriad of internal priorities as it looks to emerge from the Covid-19 pandemic. How India’s upcoming budget will balance competing priorities with limited resources will have significant implications for defense policy moving forward, particularly when it comes to long-standing goals such as modernisation of India’s armed forces and the indigenisation of India’s defense industry and procurement.